Shareholder conflicts, institutional quality, and tax avoidance

Abstract This study combines institutional theory with the logic of mixed gambles to examine how disproportionate voting rights of majority shareholders influence corporate tax behavior in the institutional context of China. We find support for our theoretical prediction that disproportionate voting rights create greater incentive for tax avoidance in China. Moreover, we leverage the heterogeneity in institutional strength across China to explicitly examine the role of institutions in shaping the relationship between disproportionate voting rights and tax avoidance. Our study extends agency research on minority shareholder expropriation by showing that when disproportionate voting rights co-exist with institutional voids, greater costs are imposed on minority shareholders and on society in the form of lower tax revenue for social investment. Practically, our findings can help inform the regulatory debates about the societal consequences of corporate structuring mechanisms (dual class shares and pyramid ownership) that enable disproportionate voting rights and give dominant shareholders outsized control over corporate resources. Our results also advance knowledge regarding the consequences of weaker institutional environments for minority shareholders and society more broadly.